Types of mortgages much more limited than it has been

What goes up must come down. For years, banks created a dazzling array of mortgages with various rates and terms. Then the whole world collapsed and most of these products disappeared. Here is what's left as of the middle of 2009.

The amount you “put down” from your own money towards the purchase of the property is the single most important requirement for any mortgage. The more you can put down the better the rate. The reason for this, is that lenders know that anyone who has a lot of their own money in a house is unlikely to default.

It was not long ago that you could get a mortgage with zero down. No more. But the FHA has once again become a big player in the mortgage insurance market and they allow mortgages with down payments as low as 3.5%.

Conventional Mortgage

Normally you should put as much down as you can. Putting down at least 20% of the purchase price gets you a “conventional mortgage. Today you will almost certainly be required to put this much down unless you go with the FHA or buy private mortgage insurance.

Putting down more than 20% might have some effect on your rate, and it might not, but it will certainly lower your monthly payments. If you think you can invest the extra money without putting yourself in jeopardy, you might want to do that. Or you could simply pay an extra $100 or so every month whenever you can. It's incredible how much you can save over the course of the mortgage.

When you look at conventional mortgages you should compare more than interest rates (make sure you compare Annual Percentage Rate or APR and not other rates) and down payments. "Points" paid up front are usually not worth the reduction in interest rate unless you plan to be in the mortgage (without refinancing) for at least 10 years. On the other hand, if you are thinking you may want to refinance in the future, you need to check carefully on the prepayment penalties. Some mortgages will charge you hefty fees if you refinance in the first five years, or even longer.

In the next year or so, the government may set up a "plain vanilla" mortgage that has standard provisions, including limited prepayment penalties and escrow for taxes and insurance so the total cost of owning the home is clear to the buyer. It should be easy to compare standard mortgages from different banks if they all conform to the same provisions.

Low down payment mortgages

These have become much tougher to get since the crash in the mortgage market but they are still available, particularly the ones insured by the FHA. Mortgages on properties where you are making a down payment of less than 20% require that you purchase “mortgage insurance.” There are two types, government and so-called Private Mortgage Insurance (PMI). The Federal Housing Administration (FHA) provides most of the insurance. Buying this insurance will usually raise your interest rate by half a percentage point or more. On a $200,000 mortgage that could be nearly $800 a year for as long as you hold the mortgage.

The insurance will reimburse the lender if you default on the loan and the lender is stuck, but if there was any problem with the original application for the mortgage, the insurer may refuse to reimburse the lender.

In addition to paying for mortgage insurance, borrowers who put less than 20% down almost always end up paying higher interest rates. So you can save a fair amount of money simply by putting 20% down.

Another problem for borrowers with low down payment loans is that if property values go down more than they already have, borrowers are more likely to give up on the house and allow the lender to foreclose thinking that will be the end of it. It isn’t. The lender will come after you for the difference between the mortgage balance and what they were able to get for the house. You are still legally obligated.

Second Mortgages

If you already have a mortgage on your house but you want to borrow money for repairs or an addition or even to buy a car or for some other purchase, many banks and mortgage companies will still give you a “home equity” loan or line of credit if you have enough equity in your home. (No longer will they give you a second mortgage that would drive your total to as much as 125% of the value of your home.)

For example, your house might be worth $300,000 today but the balance remaining on your mortgage might be only $150,000. Almost any bank would give you some sort of second mortgage (that’s what home equity loans are), but total of the two mortgages is unlikely to exceed 80% of the value of your house.

If you default, the holder of the first mortgage has to be paid off first (before the holder of the second mortgage gets any money) so the rate on the second mortgage will generally be much higher than the first mortgage rate, unless the interest is variable, in which case it could be lower, at least to start . Some home equity loans change rates every month.

Rates are often pegged to a published index, like the London Interbank Offered Rate (LIBOR) -- the most widely used benchmark or reference rate for short term interest rates. (LIBOR is the rate of interest at which banks can borrow funds from other banks, in marketable size, in the London interbank market.) Index-pegged rates can go up by many points in just a few months as short term rates are rather volatile.

The amount of equity you have left in your home after the two mortgages are paid off is also a determining factor in how much interest you will pay. Borrow as little as you can, and always remember these payments are on top of whatever it is you are paying for your first mortgage.

When you look at a second mortgage, you should also think about refinancing your house with a larger first mortgage in order to take out money. A first mortgage will probably have a lower interest rate. However, if you set it up for a long period, like 30 years, and do not pay it down sooner, the total interest you pay will be much higher in dollar terms since second mortgages generally require shorter pay back periods.

Reverse Mortgages

This type of mortgage has been around for about 25 years or so, but it recently has become much more common under federal guarantees and sponsorship.

In a “normal” mortgage you get all the money up front and pay it back slowly over time. In this type of loan, while you might get something up front, you usually get most of your money over time (usually a monthly check) and pay it back in a lump sum when you sell the house or die.

This type of loan is designed to help older people (you must be over 62 in most cases) to take money out of their homes for living or medical expenses. For example, someone who is 70 years old and needs more money to be able to stay in their house might apply for a reverse mortgage. Let’s say he gets $40,000 up front to pay off the old mortgage and to pay all fees associated with the reverse mortgage (insurance fees, brokerage fees etc. -- they can really mount up) and then takes $1,000 a month.

At the end of the first year his mortgage balance will be $40,000 plus $12,000 (these are both “principal”) plus interest on the principal. This whole amount becomes the base principal for the next year and the calculation goes on like that from year to year.

Three things stop this process:

Reaching the maximum balance for the loan, which is known in advance. (Federal regulations determine maximums for every area. Generally, in high priced areas loan limits are now as high as $362,790. In rural and non- metropolitan areas, you can borrow up to $220,160.)
Usually it takes many years to hit the limit. If you get there, no more payments are made but neither is their any need to pay off the loan. You are not thrown out of your house.

The sale of the house. If you sell the house, the mortgage balance must be paid off, just as it is with a conventional mortgage. That part is the same.

The death of the borrower. When this happens the mortgage comes due. If the family wants to keep the property they have to refinance the house with a conventional mortgage and pay off the balance.

Remember though, as long as the borrower is alive they do not have to pay off the loan or sell your house.

Bridge Loans

These are loans secured by a mortgage on your property that are intended for short term use. Often they are used by people who have bought a new house and not yet sold their present home. The loan will give them the cash necessary to close on the new house. It may even be enough to pay off the existing mortgage on the old house. Sometimes there are no payments due until the old house is sold, when the whole bridge loan must be paid off.

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